Maximum drawdown
The worst fall from a previous high the portfolio ever had.
How it is computed here
The cumulative curve against its own running maximum, taking the lowest point of that distance.
Worked example
- The growth of one unit peaked at 1.4885 on 2021-03-17.
- Its lowest point after that was 0.9018, on 2022-03-21.
- 0.9018 ÷ 1.4885 − 1 = -39.4%.
Demo portfolio: four invented companies, generated prices, measured by the real engine. Past returns do not predict future ones.
Where it misleads
It is one single day out of the whole history. It says how deep it got and nothing about how long it lasted, which is what actually makes people sell — that is what time under water and the ulcer index are for.
The formula
- Ri — the portfolio's return on day i (time-weighted, so deposits and withdrawals do not count as gains or losses).
- Wt — the wealth index: what 1 invested at the start had become by day t.
- Mt — the highest value the wealth index had reached up to day t.
- MDD — the maximum drawdown: the lowest value of Wt ⁄ Mt − 1 over the whole history, always zero or negative.
How to read it
The maximum drawdown answers the question most investors actually feel: how bad did it get? It is measured from a previous high, not from what was paid, so a portfolio that doubled and then fell 30% has a 30% drawdown even though it is still well above its cost.
Because it is a single point — the worst day of the whole history — it grows with the length of the history. A two-year record has had fewer chances to meet a bad market than a twenty-year one, so a small figure over a short window says little. Read it together with the dates it covers.
The recovery arithmetic
Losses and gains are not symmetric. After a fall of d, the portfolio needs a gain of d ⁄ (1 − d) to be back where it was:
| Fall | Gain needed to recover |
|---|---|
| −10% | +11.1% |
| −20% | +25.0% |
| −35% | +53.8% |
| −50% | +100.0% |
This is why deep drawdowns matter more than their size suggests: the deeper the fall, the longer the climb back, and the more likely it is that someone sells somewhere near the bottom.
Compared with
- Time under water — how long the portfolio stayed below its previous high, which drawdown ignores
- Ulcer index — every fall weighted by depth and duration, not only the worst one
- Volatility — how much the portfolio moves in both directions, on an ordinary day
Questions people ask
Is a 20% maximum drawdown a lot?
It depends on what the portfolio holds and for how long it was measured. A broad stock index has had falls of 30% to 55% in each of the last few decades, so a stock portfolio with a 20% maximum drawdown over a long history has been through calm times, not proven itself calm. Compare the figure with the same measure for a benchmark over the same dates.
Why is it shown as a negative number?
Because it is a loss measured from a previous high. −35% means that at the worst moment the portfolio was worth 35% less than at its best point before that moment.
What gain does it take to recover from a drawdown?
More than the fall itself, because the recovery starts from a smaller base. After a fall of d, the gain needed is d ÷ (1 − d) — 25% to recover from −20%, 100% to recover from −50%.
Sources
- Magdon-Ismail, M. & Atiya, A. (2004), Maximum drawdown, Risk 17(10)
- Grossman, S. & Zhou, Z. (1993), Optimal investment strategies for controlling drawdowns, Mathematical Finance 3(3)
Last reviewed 2026-09-27 by Sphinx Risk.